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Twin-track training

A member of the board of Knorr-Bremse Asia Pacific explains how the German braking-systems company has developed a global–local approach to capability building in China.

Most multinationals seeking to establish a successful local business have to build a high-performing team with strong capabilities and relevant local knowledge. I know from experience that in such a competitive and rapidly growing market as China, it’s a daunting task to shape an organization that combines the best local talent with the practices and culture of the parent company.

Knorr-Bremse now has seven wholly foreign-owned or joint-venture factories in China making state-of-the-art braking systems and other subsystems for the railway industry, as well as two major factories manufacturing parts for commercial vehicles. We’ve succeeded by using a phased approach that reflects how our China organization has evolved from a small local presence, tightly run by group headquarters in the early years, to a more fully fledged, entrepreneurial, and self-standing business today. Our approach also acknowledges the changing nature of the Chinese marketplace and the growing demands of the customers we serve.

In the almost 15 years since we first started local production and assembly in China to supply air brakes to Shanghai Metro, the Knorr production system (KPS) has been central to our operations. Closely modeled on the classic Toyota Motor production system and applied to our industry environment, it reflects our focus on quality, efficiency, and safety. This means that if you go to any of our plants in China, Europe, or the United States, you’ll find the same culture and ways of working.

Our ramp-up in China was massive, especially from 2004 onward, when the Ministry of Railways allowed the introduction of localized non-Chinese technology for the country’s new high-speed railway network. Provided we could produce and deliver what our customers were asking for, we were well positioned to grow very quickly.

While our Chinese companies have always had—and still have—local managing directors, operations were primarily driven by KPS-trained expatriates, and most of the engineering skill and knowledge in our brake products remains in Europe. Initially, the management capabilities and strategic drive for China came from these expatriate managers, from the heads of our centers of competences in Germany (who had direct responsibility for making the Chinese operations work), and from our Asian headquarters in Hong Kong.

With KPS as the backbone, the key challenge was to instill the execution and quality culture into our local employees. We taught those in “line” jobs how to apply KPS methods and tools so as to achieve the right standard of reliability, rather than providing them with theoretical training they would have had to transfer to the workplace themselves. We strove to create a culture of continuous improvement on and from the shop floor—which doesn’t come naturally in a country that’s far more hierarchical than ours.

An important dimension for us from the beginning was to foster a workplace where people wanted to stay. Knorr-Bremse’s long history and reputation in the market certainly helped, as did our rapid expansion and our emphasis on employee learning. As a result, Knorr-Bremse’s attrition rate at, for example, Suzhou (near Shanghai) is today about a third that of the surrounding industrial players. That’s a huge competitive edge; if, as some companies do, you have to replace one-quarter of your workforce each year, the investment in training multiplies accordingly. We still lose too many people—every well-trained and experienced member of our staff who leaves the company is a big loss—but we are making a big effort to improve our retention rate.

The second phase of our China journey, starting about four years ago, has not only made our operations more self-reliant but also increased our local application-engineering know-how and expertise. Gradually, local leaders started to replace our expats. The need to work on problem solving with our Chinese customers and to meet their new requirements prompted us to add more China-based engineering support. In some cases, we even started to develop, entirely on our own, local products such as platform screen doors that separate passengers from the railway track when there is no train in a station. Since at least 80 percent of the world market for these products is in China, we knew that we could be successful only by developing them there instead of relying on imported technology. For this part of the business, we therefore established our center of competence for product development in Guangzhou—a move that I am absolutely convinced was and is the right step. However, we have taken a different approach with our brake products, which are more safety sensitive and complex.

Knorr-Bremse has now embarked on a third phase of capability building, which will help our operations in China become fully self-standing for our other products. We are concentrating on both the better application of local engineering skills to the needs of local customers, as well as the development of an organization and business system that can meet heightened customer expectations. Our competitors do not sleep on the job; if we don’t act, they will.

Chinese customers may take a bit of time to make up their minds about things, but when they have decided on, say, a supplier, they expect delivery yesterday. For us, that means instilling a Chinese organizational culture that builds on European processes for systematic quality control while adapting to the more flexible approach of our Chinese customers. Some will say that this challenge is as tough as squaring a circle. It’s certainly not easy, but we are making progress. Non-Chinese people sometimes find it hard to understand the expectations of our Chinese customers, but it is our responsibility to ensure that Knorr-Bremse’s organization is well adapted to meet their needs and allows us to remain their trusted partner. In other regions, companies may object that a particular quality problem is not their responsibility and do nothing about it. In China, by contrast, you need to help your customer solve the problem first; only later should you sort out whose fault it is and how you’re going to share the cost. If the customer is king in Europe and the United States, in China the customer is god.

Most people know the concept of guanxi: the personal relationship between individuals exchanging favors. That is very important in a Chinese business context. I believe that in addition to personal guanxi, which will always play an important role, we need to think about company relations in that light. For me, this “corporate guanxi” means that companies exchange services and help each other out even if there is no contractual obligation to do so. You know that a trusted partner—a customer or a supplier—will return the favor in due course, and both parties will ultimately benefit from a long-term trusting relationship.11.Chinese companies, like their counterparts everywhere, naturally look after their own interests, and may do so in a more direct way. Building a relationship of trust does not mean ignoring the attention and mechanisms needed to protect legitimate rights—for instance, safeguarding intellectual property.

What I’m talking about is a way of doing business that formerly prevailed in Europe but has gotten lost in a world where companies there and in the United States too often write huge contracts and then haggle over the small print. We must embed corporate-guanxi thinking not only into our local-company culture but also into our broader business model for China.

Our step-by-step, phased approach has served us well, and I think others can learn from it. However, given the speed of change in China, it is necessary to reevaluate the master plan at any moment. What seemed like the right thing to do today might be overtaken by some new development tomorrow.

About the author(s)

Henrik Thiele is a member of the board of Knorr-Bremse Rail Asia Pacific, based in Hong Kong. This commentary is adapted from an interview by Gernot Strube, a director in McKinsey’s Hong Kong office, and McKinsey Publishing’s Tim Dickson.

The author would like to thank Knorr-Bremse’s Martyn Perkins for his helpful comments and advice.

June 2013 – Companies that continue to base their manufacturing strategies solely on China’s rock-bottom wages and stratospheric domestic growth rates are in for a rude awakening. New challenges will require new competitive priorities.